قوانین سیاست های پولی در اقتصاد باز : اثرات بر چرخه های رفاه و کسب و کار

This paper computes welfare maximizing Taylor-style interest rate rules, in a business cycle model of a small open economy. The model assumes staggered price setting and shocks to domestic productivity, to the world interest rate, to world inflation, and to the uncovered interest rate parity condition. Optimized policy rules have a pronounced anti-inflation stance and entail significant nominal and real exchange rate volatility. The country responds to an increase in external volatility by holding more foreign assets. The policy rule affects the variance and the mean of consumption. The effect on the mean matters significantly for welfare.

The effect of the monetary policy regime on welfare and business cycles is a key question in economics. This paper examines that question using a micro-based quantitative (calibrated) business cycle model of a small open economy in which monetary policy affects real activity because of staggered price setting. Much effort has recently been devoted to develop dynamic general equilibrium models of open economies with monopolistic competition and sluggish prices (or wages)—see Lane (2001) for a survey of that work, often referred to as “New Open Economy Macroeconomics” (NOEM). An important strand of the NOEM literature uses highly stylized models (for which analytical results can be worked out) to determine welfare under alternative exchange rate regimes and to derive optimal monetary policy rules. The simplifying assumptions generally made in these models include, in particular: full international risk sharing, a stripped-down structure of shocks (mostly just one type of shock—productivity shocks), and the absence of physical capital.1 Another strand of the literature develops quantitative business cycle models that can be used to study the key features of international macroeconomic data.2 The models studied in the first strand seem too stylized for empirical analysis, whereas computing welfare (and welfare maximizing policy rules) in quantitative business cycle models has, until now, not been practically feasible, given available numerical techniques. The paper here bridges these two approaches by determining welfare maximizing Taylor (1993a)-style interest rate rules, using a quantitative business cycle model. This is made possible by recent advances in solving dynamic models (Sims, 2000). The model here extends the sticky-prices open economy model that Kollmann (2001a) calibrated to data for Japan, Germany and the U.K. It assumes imperfect international risk sharing due to incomplete international financial markets (transactions restricted to trade in bonds) and physical capital (like standard business cycle models). In the model, there are shocks to domestic productivity, to the world interest rate, to world inflation, and to the uncovered interest parity condition (“UIP shocks”). Monetary policy is described by a rule according to which the nominal interest rate is set as a function of the inflation rate and of GDP. Imperfect risk sharing is more realistic than the complete risk sharing assumed in previous welfare analyses.3 In the bonds-only structure here, macroeconomic variability affects the mean net foreign asset position—which has significant consequences for welfare.4 That effect is not present in models with complete risk sharing. UIP shocks are assumed here because of the well-documented strong and persistent departures from UIP during the post-Bretton Woods (post-BW) era (e.g., Lewis, 1995). Also, econometric attempts to explain short-run exchange rate movements from changes in monetary policy (and other macro fundamentals) have failed (e.g., Rogoff, 2000). Structural models driven only by “traditional” fundamentals generate predicted exchange rate variability that is much smaller than that seen in post-BW data; thus, such models are not well suited to analyzing a floating-rate regime. The model here—with UIP shocks—generates more realistic exchange rate volatility; the predicted standard deviation of the Hodrick–Prescott (HP) filtered nominal exchange rate is 7.1% (in a version of the model without UIP shocks, the corresponding standard deviation is 3.4%); the standard deviations of HP filtered quarterly exchange rates of Japan, Germany and the U.K. vis-à-vis the U.S. were about 9% during the post-BW era. (In the NOEM literature, only McCallum and Nelson (1999) and Batini and Nelson (2000) compare alternative policy rules using models with UIP shocks, but these authors do not compute welfare.) The present model is solved using Sims’ (2000) new method that is based on a quadratic approximation of the equilibrium conditions. In contrast to the solution methods based on linear approximations that are widely used in macroeconomics, the Sims approach allows to compute the (second-order accurate) effect of the policy rule on expected values of macroeconomic variables—an effect that is crucial for welfare in the model here. Compared with other non-linear solution methods (see Judd, 1998), the Sims method has two key advantages—the ease with which it can be applied to models with a large number of state variables and its high computational speed. These features allow to numerically determine the coefficients of the monetary policy rule that maximize welfare.5 The optimized rule entails rather strict (but not perfect) targeting of the growth rate of the domestic producer price index (PPI): the implied standard deviation of PPI inflation is low (0.08%). It yields a welfare level that is close to that of the economy under flexible prices. The domestic interest rate falls in response to positive shocks to domestic productivity; it shows little response to UIP shocks and to shocks to the world interest rate and to world inflation. The rule implies significant nominal and real exchange rate volatility. Permitting a direct response of the interest rate rule to the nominal exchange rate yields only a minuscule welfare gain. Under the optimized rule, productivity shocks are the main source of fluctuations in output and consumption, while UIP shocks are the dominant source of exchange rate fluctuations. UIP shocks have a positive effect on welfare i.a. because they lead the country to hold a larger stock of foreign bonds. Hence, with UIP shocks, the country is wealthier (on average), and it enjoys higher mean consumption. Prior research shows that when price stickiness (in producer currency) is the only economic distortion (so that the flex-prices equilibrium of the economy is efficient), and exchange rate changes are fully and immediately passed through into import prices (ensuring that the law of one price (LOP) holds), then welfare maximizing monetary policy requires perfect stabilization of the domestic PPI (e.g., Aoki, 2001; Devereux and Engel, 2000; Galı́ and Monacelli, 2000). That policy replicates the flex-prices equilibrium and entails a floating exchange rate. Full PPI stabilization is not optimal when (as in the model here) the flex-prices equilibrium is not efficient (here: i.a. monopolistic distortions) or when exchange rate pass through is limited. It thus seems worth noting that the optimized policy rule, in the economy discussed here, does entail rather strict (but not perfect) PPI inflation targeting, and that it yields a welfare level close to that in the flex-prices economy. The results suggest that (near) PPI inflation stabilization is also desirable under the more realistic assumption that exchange rate pass through is limited, as a result of pricing-to-market (PTM) (the data clearly reject full pass through and the LOP; see, e.g., Knetter, 1993; Campa and Goldberg, 2001). In the model here, pegging the exchange rate reduces welfare. Under a peg, external shocks require strong and immediate adjustment of the domestic interest rate—these shocks thus have a more destabilizing effect on consumption (than under the optimized rule). In addition, a peg reduces mean consumption, since the increased volatility of goods demand under a peg induces firms to set higher price-marginal cost markups. Under the plausible assumption that pegging the exchange rate reduces the variance of UIP shocks (UIP shocks were smaller under the BW system than in the post-BW era), the country holds a smaller stock of foreign bonds under a peg—which also lowers welfare. The model captures the fact that nominal and real exchange rate volatility among the major currency blocs has risen sharply after the end of the BW system, whereas output volatility has shown little change (e.g., Baxter and Stockman, 1989). Section 2 of this paper presents the model and discusses the solution method, Section 3 presents the results and Section 4 concludes.

This paper has computed welfare-maximizing Taylor-style interest rate rules, in a business cycle model of a small open economy with staggered price setting. Shocks to domestic productivity, to the world interest rate, to world inflation and to the uncovered interest rate parity condition are assumed. Optimized policy rules have a strict anti-inflation stance and imply significant nominal and real exchange rate volatility. The country responds to an increase in external volatility by holding more foreign assets. The policy rule affects the variances and the means of macrovariables, and this effect on the means matters significantly for welfare.